Sunday, June 24, 2012

Blindsided By a Cash Flow Problem?

The best way not to get blindsided by a cash flow problem is to have either a 13 week rolling cash flow forecast or a 12 month rolling cash flow forecast.  I believe that the 12 month rolling cash flow forecast is better as it gives a longer range view with more “what if” analysis capability giving the business owner the ability to not only know a cash flow problem is coming but time to avert it!

When those tools are not in place the business owner can get blindsided by a cash flow problem.  Even if those tools are in place sometimes the cash flow problem although the forecast told you it was coming could not be averted or the business owner saw it coming and decided to take on risk because there was a great opportunity to take advantage of, that ultimately did not work out.  Whichever scenario occurred you are now faced with a cash flow problem.

As a CFO consultant one of the first things I tell my clients is that in order to successfully get through this cash flow problem you must be in control of each vendor situation.  To me that means to be as proactive as possible.  Let me explain.  Most business owners when they are in a cash flow problem do not communicate with their creditors.  They remain silent and in hiding and as a result the creditors are making the phone calls to them and dictating their various demands for payment.  What I am proposing is to now prepare a 13 week rolling cash flow forecast because since we are officially having a cash flow problem looking at the short term view is most advantageous.  With the 13 week rolling forecast you can determine how much free cash flow is available to pay bills.  Then the next step is to determine the absolute "must pays" making top on that list payroll, payroll taxes, sales taxes and any other fiduciary taxes.  The next step is to create payment plans for the creditors so that everyone gets not everything but at least something.  The next step is do not be silent, but to communicate with the vendors as early as possible letting them know how much and at what time intervals you are going to pay them. You dictate the terms.  You are in control!

Usually when you handle the situation in a proactive manner like the aforementioned strategy you get respected for it.  However, not always are they going to accept your terms.  Sometimes they meet you halfway; sometimes they do not accept them at all and demand payment.  You have to expect this to happen.  That is why you do not allocate all of your free cash flow to these payment plans up front.  Reserve some for the creditors who may be adverse. These situations have to be handled on a case by case basis. 

If you find yourself in the midst of a cash flow problem, being proactive puts you in control of a very difficult situation.  A Cash Flow Problem is never an easy situation, but I have seen too many situations where the business owner was not proactive and things went spiraling out of control.  A Part Time CFO with experience in these situations could be a beneficial resource to guide you through this stressful process.